Yancoal boon in soft market, says Gloucester

Gloucester Coal
chief executive Brendan McPherson says the miner will be better placed in the current soft coal market if its shareholders approve a merger with Chinese-owned Yancoal Australia to form the largest locally listed coal producer.

“Our assets were high-cost and there is a lot of working capital needed to move them down the cost curve," he told The Australian Financial Review ahead of a planned vote on the deal at a shareholders meeting in Sydney today.

“Yancoal, particularly through [the Moolarben mine], have a weighted cost of production that is much lower. So that positions the company better, particularly for the current market, which is soft," he said.

The spot price of thermal coal from Newcastle has fallen from $US122 a tonne in mid-February to just $US91.75 a tonne by the end of last week, amid reports from industry publication Platts that Chinese buyers were beginning to turn back cargoes from producers in the US and Colombia due to high inventory and weak demand.

Stockpiles at the Port Waratah Coal Services terminals at Newcastle reached 1.92 million tonnes by the end of May, up 743,000 tonnes from the start of the month to the highest levels this year.

Mr McPherson said while the thermal coal price had fallen, the miner was still able to sell the coal to customers at this point. “We’re seeing the volumes move, but at lower prices," he said.

However, he said the semi-hard coking coal market, in which Gloucester also takes part, remained much tougher due to competition from US mines and it was not easy to make sales. “Our view on the semi-hard [market] hasn’t changed over the last year," he said.

The enlarged size of the merged company, combined with Yancoal’s higher exposure to other types of coal, means the proportion of semi-hard in the sales mix will be lower.

Related Quotes

Company Profile

Yancoal’s parent, Yanzhou Coal, is a state-owned company that is one of the largest coalminers in China.

Following the deal, which has forecast synergies with a net present value of up to $380 million, Yanzhou will own 78 per cent of the listed Yancoal. Hong Kong’s Noble Group, currently the majority shareholder in Gloucester, will own 13 per cent, and 9 per cent will be held by other shareholders in the Australian miner.

The listed Yancoal is expected to have $3.6 billion of net debt, the bulk of it from Chinese banks.

“A lot of people would say that much debt isn’t a stronger balance sheet, but it is a very strong parent," Mr McPherson said. “We think [Yanzhou] are a good company to be involved with."

Pengana Global Resources Fund portfolio manager Tim Schroeders, who does not have shares in Gloucester, said he thought the Yancoal merger made strategic sense.

“It is a question of whether the pricing is appropriate, and do I want to invest in Yancoal/Gloucester. Not at this stage," he said.

Gloucester shares closed 4¢ lower at $6.87 on Friday. As part of the deal, Gloucester shareholders will be paid a 44¢ special dividend and a $2.71 capital return on June 21 before Yancoal shares begin trading on June 25.